Is it foolish to buy Netflix shares?

Netflix (NASDAQ:NFLX) is a streaming giant that has revolutionised the way we watch movies and TV shows. But with the share price cooling off after a rally in recent months, are Netflix shares at a potential buying level for my portfolio?

Why would I be interested in Netflix shares?

There are several compelling reasons why investors might still want to consider investing in Netflix, despite the rally we’ve seen.

• Growing user numbers — User numbers have climbed a further 5.9m in the latest quarter, now at over 230m paid subscribers. This is notable given the crackdown in password sharing and changes in the advertising model.
• Revenue growth — In the last five years, Netflix’s revenue has grown at an average annual rate of 20%. This growth is being driven by the increasing popularity of streaming, as well as Netflix’s expansion into new markets, such as gaming. Future earnings growth is expected at 20%, despite revenues reducing slightly.
• Market share — Netflix has a dominant market share in the streaming market. The company accounts for over 20% of the global streaming market. It has a strong library of content and is constantly investing in new content. Netflix is also expanding into new regions, such as India and Africa.

What are the risks?

• Competition — As noted, the company is facing increasing competition from other streaming providers. Disney+, HBO Max, and Amazon Prime Video are all growing rapidly, and they are all gradually taking market share from Netflix.
• Writer strikes — Recent strikes from writers in the US have put pressure on future releases. Subscribers may be unwilling to continue if there are no new interesting releases.
• Regulation — Netflix is facing increasing pressure from regulators. Some regulators are concerned about the amount of power that Netflix has, and are considering imposing new regulations on the company.
• Saturation — Netflix is facing increasing challenges in its core markets. In the US, Netflix is facing saturation, and it is becoming more difficult to attract new subscribers.
• Debt — Netflix has a $14.5bn debt, which may concern investors. Despite this, interest payments are well covered, and this does not pose any immediate threat to the business.

How are the fundamentals?

• Price-to-earnings (P/E) ratio — The P/E ratio is a measure of how much investors are willing to pay for each dollar of earnings a company generates. Netflix’s P/E ratio is currently 43.1 times, which is notably higher than the average P/E ratio for the S&P 500. This suggests that investors are paying a premium for Netflix’s growth potential. However, this still remains lower than the sector average of 59.2 times.
• Discounted cash flow (DCF) — The DCF is a measure of future earnings. The current share price of $413.17 is currently 5% above fair value of $393.52. This suggests the recent sell off may be justified as investors take profits at a price they consider fair.

Am I buying Netflix shares?

Netflix is an interesting investment for those looking for exposure to the growth of the streaming market, despite the variety of risks.

I have owned Netflix shares in the past, and think the operating model is a winner in the long term. However, with the recent rally in shares now bringing the price above fair value, I do not want to buy at this level.